Impact of high interest rates on the US economy
US Fed
Interest rates of over two-decade highs in the US have impacted the broader economy. The Federal Reserve, in its fight against surging inflation, hiked rates aggressively to the highest in over 20 years. The rate hikes are starting to take a toll on the economy.
The Fed has managed to take the steam of an overheated US economy without pushing it into a recession. However, high interest rates are finally starting to show their effects. In the coming week, the Fed will likely keep rates on hold at its meeting.
Investors, though, are looking for a Fed pivot signal, with expectations for a start to rate cuts as early as September. Until then, though, policymakers need to assess the impact of monetary policy on the economy.
Hans Mikkelsen, managing director of credit strategy at TD Securities, said, ‘There's a tremendous amount of pain and many, many companies that are going bust because of the Fed's monetary policy.’
The US housing market was the most visibly affected by rate hikes. The Fed's policies caused borrowing costs to skyrocket and property prices to soar. The affordability of housing is at a level not seen in over 30 years of data. Usually, companies are less likely to invest and expand when interest rates are high, which acts as a brake on stock prices. But investors have mostly ignored the warnings, sending stock prices soaring to record highs.
Since the Fed began hiking rates in March 2022, the S&P 500 has jumped by almost 25 per cent, increasing household wealth by around $3 trillion. However, households with higher incomes are benefiting from the booming stock market. However, there are signs of a slowing US jobs market, which repeatedly defied expectations of a downturn.
The number of people who have been unemployed for 27 weeks or longer reached 1.5 million in June. That marks the highest level since 2017, barring a brief surge during the pandemic. Many households, especially those with lower incomes are falling back on loan and credit card payments.
Smaller businesses are taking the biggest hit. Projections from Fitch Ratings indicate that the default rate on loans will rise to 5 per cent - 5.5 per cent this year. That would be the highest level since the financial crisis in 2009. Policymakers need to take note and act with caution before permanent economic damage is done.